Whether a claim to CGT gift hold-over relief is impacted by a donor’s non-resident spouse

Mon 08 Oct 2018

The Upper Tier Tax Tribunal (UT) has allowed the taxpayer’s appeal in the case of William Reeves v HMRC [2018] UKUT 0293 (TCC) to apply a purposive construction to s167 TCGA 1992 and therefore claim CGT hold-over relief in respect of assets transferred to a UK resident company. The UT has also upheld Mr Reeves’ appeal that the legislation be read and given effect in a way which is compatible with the Human Rights Act (HRA) 1998.

A claim to gift hold-over relief under TCGA 1992 s165 is prevented if the gift is to a foreign controlled company (TCGA 1992 s167). HMRC and the First tier Tribunal had previously disallowed the claim on the basis that the UK company was controlled by Mr Reeve’s non-shareholding, non-resident wife who had no involvement in the company, by a strict reading of the legislative attribution rules.

Why is this case important?

This case demonstrates that Courts are prepared to apply a purposive construction to legislation where the relevant tests in Inco Europe are met, even where this is in favour of the taxpayer.

For a further discussion of the tax issues faced by an individual changing their place of residence, or the implications of with Withdrawal Act 2018 on the continued application of retained general principles of EU law on Brexit, please get in touch with a member of the Mazars personal tax team.

Background

• Mr Reeves was a member of a trading partnership that was planning to move its operations out of the UK to the USA.
• Mr Reeves and his wife had emigrated from the UK to the US, hence both becoming non-UK resident.
• in order to avoid the exit charge that would have arisen in respect of Mr Reeves’ share of the partnership’s assets on its migration to the US, he gifted his share of the partnership to a UK incorporated company of which he was the sole owner.
• he claimed hold-over relief under s165 TCGA 1992 in respect of the gains arising on the gift. However, this had been denied by virtue of the provisions of s167 (2) & (3) due to the attribution of control of the company to his non-UK resident wife under what is now ss450 & 451 CTA 2010.

A purposive construction

Considering the case of Inco Europe [2000] 1 WLR 586, the UT highlighted three things that a Court must be abundantly sure of before reading a piece of statute as if words had been added, omitted or substituted:

1. the intended purpose of the statute in question;
2. that the draftsman and Parliament had inadvertently failed to give effect to that purpose; and
3. the substance of the provision Parliament would have made had the error in the Bill been noticed.

Applying these requirements to the case concerned, the UT was satisfied that it cannot have been Parliament’s intention that holdover relief should be withheld merely because there is a non-resident person connected with the transferor where that person has no interest in the transferee company. It therefore held that the context in which the word ‘control’ is used in TCGA 1992 s167 (2) requires some modification. Specifically, the context of s167 (2) requires that the attribution of interests between associates be limited to those associates who hold a real interest in the transferee company. As Mr Reeves’ wife had no actual interest in the company, this would therefore allow him to claim hold-over relief on transfer of the partnership share to the company.

Application of the Human Rights Act

Section 3 of the HRA 1998 provides that, as far as it is possible, primary legislation must be read and given effect in a way which is compatible with the Convention rights. This includes prohibition of discrimination under Article 14 and protection of property under A1P1.

The UT held that there was clearly discrimination on the basis of Mr Reeves’ status as a person with a non-resident spouse as compared to one whose spouse is UK resident. It then needed to consider whether the discriminatory treatment of Mr Reeves was justified and proportionate. On this point, it found that the application of s167 (2) by reference to the residence or non-residence status of a family member of the transferor was not at all justified and is the precisely the kind of provision at which Article 14, in conjunction with A1P1, is aimed. The way the provisions apply is wholly unexpected and is an unjustifiable trap for taxpayers and their advisers when trying to plan for the future of their business. Indeed, the UT went further to say that the provision was one that would be open to abuse by a taxing authority if it was so minded by making random enquiries into hold-over relief claims to see whether any could be denied by virtue of the non-resident status of persons connected with the transferor.

On the basis that it had already held in favour of the taxpayer on two counts, The UT declined to consider whether the law as construed literally was in breach of the Treaty on the functioning of the European Union, specifically the free movement of capital.